Deathwatch Redux: Oil Over $111

by: Hard Assets Investor posted on: April 09, 2008 | about stocks: DBO / DCR / OIL / UCR / USL / USO    

By Brad Zigler

The big news is oil. And it's bullish. Wednesday's Energy Department weekly stocks report got everybody in the oil patch a contact - make that a contract - high. Crude oil, gasoline and distillate fuel inventories all nosedived last week.

Crude oil supplies zigged lower by 3.2 million barrels while industry insiders expected a zag upward of 2.2 million barrels. That's a 5.4 million-barrel surprise. No small change. Guess what effect that had on crude oil prices?

Sure enough, May crude open the NYMEX floor session 20 cents higher before the report's release, then shot up past $111, a new contract high. Keep that $111 price in mind.

Gasoline inventories also fell by a larger-than-expected margin, dropping 3.4 million barrels against intimations of a 2.3 million-barrel decline. The price effect this morning? After opening up 2 cents per gallon firmer, the May NYMEX blendstock contract zipped up 2.5% to $2.80, a new record for the contract.

But it was the distillates, including heating oil, that really took a big drawdown, falling more than three times expectations. Inventories declined 3.7 million barrels. The Street was thinking stocks would dip by only a million barrels. That surprise sent heating oil prices skyward. The May NYMEX contract grabbed more than 8 cents a gallon, or 2.6%, in upside to reach new life-of-contract highs at the $3.19 level.

Now, about the $111 crude oil price. Before the last sell-off, we ran a piece on the MacroShares oil portfolios (AMEX: UCR and AMEX: DCR) entitled "MacroShares Oil Funds: Death Watch?" which pondered the potential demise of these vexatious portfolios (the consternation occasioned by these funds is outlined in "Accounting For MacroShares Premia/Discounts").

If the NYMEX spot contract closes at or above $111 for three consecutive days, the MacroShares portfolios are going to have to wind down.

Owners of the MacroShares Oil Up (UCR) portfolio have alternative instruments in which to roll. There's the United States Oil Fund (AMEX: USO) ETF, for instance, or its recently minted sibling, the United States 12-Month Oil Fund (AMEX: USL). The PowerShares DB Oil Fund (AMEX: DBO) is also an option. For those that think exchange-traded notes are more suitable, the iPath S&P GSCI Crude Oil Total Return ETN (NYSE Arca: OIL) can be used (for comparative performance stats on these instruments, see "Monthly Oil Check."

But where do oil bears go, assuming they still wish to remain bearish or have the capital to do so? They'll be orphaned unless they're willing to short the ETF/ETN products or venture over to the futures and options mart.

Imagine that. Bears with no place to go.

This article has 5 comments! Add yours below...
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This article has 5 comments:

  •  
    John Egan
    Apr 09 11:48 PM
    Well... There's 'DUG' .. The inverse of 'DIG' .. It really doesn't correlate properly to oil though.. I overlaid the price of a barrel of oil and found an odd and rough correlation against 'DIG' until about mid July 2007... The an abrupt drop of about $20 and DIG then began tracking the price of a barrel but on a downward slope.... And all this with an 'ULTRA' ETF. Admittedly this ETF is based on producers and not the actual price of oil.

    Thx jegan ;-(
  •  
    Phil Obal
    Apr 10 01:02 AM
    My Website
    So, what is your prediction for next week, next month, or end of year? Will the price of oil be 120, 130, 140, or 150? Need to be clearer on your prediction.
  •  
    mixter
    Apr 10 09:27 AM
    Oil is like every thing else, it is worth what some one is willing to pay for it!
  •  
    Managing
    Editor
    Apr 10 10:11 AM
    My Website
    Thanks, all, for your comments. I stake no claim to a crystal ball, Phil. There are lots of pundits making oil forecasts (several are interviewed on HardAssetsInvestor.com).

    One particularly prescient forecast was made back in 2005 cheaper, when a Wall Street investment house called for a $105 per barrel top. Noting that "oil markets may have entered the early stages of what we have referred to as a super-spike period," the firm's analysts predicted oil entering a "multiyear trading band of oil prices high enough to meaningfully reduce energy consumption and recreate a spare capacity cushion only after which will lower energy prices return."

    The prediction was met with a fair amount of skepticism. A move to $105 would have represented a jump of more than 75% from mid-2005 price levels.

    Here's the fun part: Analysts cast the possibility that their prognostication could actually lowball oil's ultimate price. Back in the late '70s and early '80s, gasoline spending was a much higher percentage of consumer spending than it is today, which for some observers explains the lack of impact that seemingly high crude oil and gasoline prices had on the economy. "Our new super-spike range," the doomsday forecasters said, "assumes a level of gasoline spending relative to the economy and consumer spending that is still below the heights reached in 1979–1981, suggesting our new range could prove conservative."

    Now ... you tell me where you think black gold peaks.
  •  
    bluegold
    Apr 10 09:53 PM
    lets just shoot from the hip here, oils bottom is over a hundred; we are going to pay more worthless dollars for a commodity the whole world desires, and iran has a plan to keep oil based on the dollar so that we become a poor and hurting country. and btw, alot of countries would like to see us fold. if you see the value of the dollar falling, and the price of oil rising, we are pretty much at the same price we were at when bush got RE- elected??? awe geeze, if you want a hedge on oil, fill your tank, or buy futures. ok you read this far, buy something like gw, un-noticed and made in america. me? i don't own it, all my money is spent on gasoline. oil will stay high, as china finds the joy of driving, they are 50 years behind us and coming up fast. i hope bloomburg takes his congestive pricing over there.
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